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REMOTE  storage 

The  Initial  Financing  of  an  Enterprise 

By  E.  R.  CHAPMAN 

President,  Hudson  Trust  Co.,  New  York 
THE  PLACE  OF  THE  PROMOTER 

That  there  is  a right  way  and  a wrong  way  of  doing  things  would 
seem  to  be  so  much  of  an  aphorism  that  it  would  be  unnecessary  to 
dwell  upon  it  before  such  an  intelligent  and  experienced  body  of 
business  and  professional  men  as  compose  this  group;  yet  there  are 
many  men  of  high  intelligence  who  evidently  think  that  the  starting 
of  an  enterprise  is  an  exception  to  this  rule. 

When  a man  or  a group  of  men  decide  to  start  a company  they 
realize  that  certain  steps  have  to  be  taken,  that  they  should  be  taken 
with  due  care,  that  they  should  be  taken  in  proper  order,  and  that 
these  proceedings  take  time  and  that  time  is  money. 

Now,  to  save  as  much  of  this  time,  or  money,  as  possible  is  proper, 
but  how  to  save  it  is  the  question  that  always  arises.  Shall  they  do 
the  work  themselves,  or  shall  a promoter,  a man  who  makes  a busi- 
ness of  doing  such  work,  be  secured?  The  name  promoter  has  fallen 
into  disrepute  because  of  the  bad  work  done  by  men  who  have  been 
failures  at  everything  else  in  their  lives  and  have  taken  up  the  work 
of  starting  enterprises  as  a profession.  Most  of  these  have  had  a 
greater  anxiety  to  realize  an  immediate  profit  for  themselves  than  to 
j assure  the  capitalists  whom  they  were  endeavoring  to  interest  in  their 
projects  a safe  and  remunerative  investment.  But  because  there  have 
been  bad  promoters  does  not  necessarily  mean  that  there  have  not 
/'  been  and  are  not  good  ones.  There  are  good  and  bad  workmen  in 
all  lines  of  business,  and  this  is  not  an  exception. 

So  it  will  come  down  to  this:  It  will  cost  a certain  amount  of 
money  to  get  started  anyway.  It  will  cost  less  money  in  the  long  run 
to  start  right  than  to  start  wrong.  If  one  is  equipped  with  the  neces- 
sary knowledge  to  start  right  himself,  it  would  be  a waste  of  money 
to  hire  some  one  to  do  the  work  of  starting  for  him,  but  if  not,  then 

Read  at  the  first  meeting  of  the  Efficiency  Society,  held  in  New  York  City,  March  18 
and  19,  1912. 

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by  all  means  a man  who  has  a good  reputation  for  honesty  and  for 
success  in  that  kind  of  work  should  be  secured. 

There  have  been  about  as  many  industrial  failures  that  can  be 
traced  to  incapable  promoters  who  brought  the  enterprises  into  the 
world  as  there  have  been  human  failures  in  life  who  can  trace  their 
weaknesses  back  to  the  ignorance  of  their  parents,  and  the  attendants 
whom  they  secured  to  assist  them,  at  their  birth. 

THE  IMPORTANT  CONSIDERATIONS  IN  A PROMOTION 

In  promoting  a corporation  which  is  to  take  over  patents,  rights, 
or  properties,  the  following  points  should  receive  careful  consideration 
and  the  most  rigid  investigation. 

First,  the  validity  of  the  patents,  or  the  clear  and  unincumbered 
title  of  the  rights  or  properties  must  be  secured  as  nearly  as  the 
closest  investigation  can  determine  them,  for  the  entire  structure  of 
the  enterprise  must  be  built  upon  this  validity,  or  these  rights. 

Second,  the  probability  and  strength  of  competition  must  be  fully 
investigated. 

Third,  the  probability  of  the  proposed  corporation  being  able  to 
command,  at  a reasonable  cost,  the  talent  necessary  to  make  the  enter- 
prise successful  must  be  assured. 

Fourth,  the  amount  of  capital  required  to  insure  the  success  of 
the  enterprise  should  be  amply  sufficient  to  cover  all  expenses,  in- 
cluding experimentation  if  necessary;  and  to  provide  whatever  facil- 
ities are  necessary  for  successful  operation,  so  that  it  will  be  unneces- 
sary to  apply  a second  time  to  the  subscribers  of  the  stock  of  the 
corporation.  The  capital  should  also  be  so  limited  in  amount  that 
interest  and  dividends  will  not  be  so  heavy  a burden  as  to  lead  to 
failure,  as  it  is  manifest  that  both  under-capitalization  and  over-capi- 
talization must  be  avoided  if  the  enterprise  is  to  be  successful. 

Fifth,  if  the  enterprise  is  of  a character  that  is  likely  to  appeal  to 
a large  number  of  small  investors,  the  capital  stock  of  the  corporation 
might  be  fixed  at  a small  valuation,  but  if  investors  of  large  resources 
are  to  be  solicited,  the  shares  of  the  stock  can  be  more  conveniently 
fixed  at  not  less  than  one  hundred  dollars  per  share.  Experience  has 
demonstrated  that  in  the  majority  of  industrial  and  railway  enterprises 
the  most  convenient  value  of  shares  is  this  amount. 

Sixth,  as  to  the  amount  that  should  be  expended  for  promotion, 
it  would  seem  that  the  corporation  might  properly  pay  in  cash  the 
actual  disbursements  of  the  promotor,  but  that  his  compensation 

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should  in  every  case  be  in  the  shares  of  the  corporation  he  is  pro- 
moting. If  he  is  not  satisfied  to  accept  such  shares  as  his  compen- 
sation, it  would  indicate  a lack  of  confidence  in  the  success  of  the 
enterprise,  and  his  appeal  for  capital  might  be  looked  upon  with  some 
misgiving. 

Seventh,  in  capitalizing  a manufacturing  business  a question  to 
be  carefully  considered  is  whether  at  the  initial  point  of  the  enterprise 
the  manufacturing  plant  should  be  constructed,  or  the  proposed  prod- 
uct contracted  among  existing  manufacturers  having  the  necessary 
facilities.  To  determine  this  question  the  most  careful  estimates  must 
be  made  as  to  the  cost  of  the  proposed  plant  and  the  creation  of  an 
establishment,  fully  equipped,  to  carry  on  the  manufacturing.  The 
closest  investigation  must  also  be  made  of  the  power  and  labor  re- 
quired for  the  production  of  the  article  to  be  manufactured,  including 
also  the  interest  on  the  investment  in  the  plant  and  the  regular  allow- 
ance for  depreciation.  With  the  estimate  thus  arrived  at — and  it 
should  be  sufficiently  large  to  cover  all  possible  contingencies — owners 
of  other  plants  capable  of  producing  the  articles  can  then  be  canvassed 
with  a view  of  ascertaining  the  lowest  price  at  which  the  article  can 
be  delivered,  with  freight  added,  to  the  point  of  distribution.  It  will 
then  be  possible  to  determine  whether,  under  the  circumstances,  it  is 
advisable  to  construct  the  plant  or  contract  for  the  article  the  corpo- 
ration is  to  sell. 

Eighth,  if  it  is  possible  to  secure  in  advance  the  services  of  a gen- 
eral manager  who  has  a record  of  success  in  similar  undertakings,  it 
is  often  of  great  assistance  in  securing  capital  required  for  the  new 
enterprise. 

Ninth,  the  advantages  of  a corporation  over  a partnership  in  a 
manufacturing  or  commercial  business,  so  far  as  the  invester  is  con- 
cerned, are  so  manifest  as  scarcely  to  require  statement.  For  any  modern 
business  requiring  a large  aggregation  of  capital,  a large  number  of 
people  can  be  found  to  invest  a small  amount  of  capital  when  it  would 
be  found  impossible  to  obtain  the  necessary  amount  from  a few  indi- 
viduals who  would  be  willing  to  become  partners,  particularly  in  view 
of  the  nominal  liability  of  the  stockholders  in  case  the  corporation  is 
unsuccessful  and  becomes  involved  in  debt.  It  is  safe  to  say  that 
the  business  of  the  United  States  would  never  have  been  expanded 
as  it  has  in  the  last  fifty  years  if  it  had  not  been  for  the  laws  per- 
mitting corporations. 

Tenth,  in  promoting  enterprises,  the  question  of  the  personnel  of 
the  capitalists  to  be  approached  with  the  view  to  securing  an  invest- 

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ment  must,  of  course,  be  considered,  but,  as  a rule,  it  has  been  found 
that  capital  can  be  obtained  for  a new  enterprise  more  readily  from 
men  with  experience  in  similar  lines  of  business  than  from  other 
sources.  For  instance,  it  is  always  found  that  an  enterprise  proposing 
to  manufacture  cotton  goods  can  be  more  easily  financed  among  men 
who  have  had  experience  in  manufacturing  cotton  goods  than  else- 
where. The  same  may  be  said  of  the  manufacturing  of  iron  or  any 
other  of  the  numerous  branches  of  manufacture  which  complicated 
conditions  of  life  have  made  necessary. 

EFFICIENCY  IN  FINANCING 

It  is  evident  that  within  the  scope  of  this  brief  paper  it  is  impos- 
sible to  do  more  than  touch  upon  these  points.  Each  one  involves  so 
many  considerations  that  it  is  in  itself  a complex  problem.  Failure  to 
give  any  one  of  them  its  due  attention  may  result  in  the  failure  of 
the  whole  enterprise. 

The  application  of  the  universal  efficiency  principles  to  the  initial 
financing  is  less  apparent,  but  no  less  certain,  than  to  other  depart- 
ments of  the  business.  Here,  as  elsewhere,  expert  guidance  is  always 
useful  and  sometimes  essential.  Here,  as  elsewhere,  waste  can  be 
avoided  and  greater  results  secured  by  proper  organization  and  direc- 
tion of  energy.  Here,  more  than  in  most  other  places,  scientific  knowl- 
edge and  planning  must  be  used,  for  a mistake  at  the  outset  is  not 
easily  to  be  repaired.  The  financial  history  of  our  own  Nation  teems 
with  instances  of  the  disastrous  cost  of  bad  management  in  raising 
and  expending  funds. 

Finance  is  the  basis  of  all  commerce.  Inefficient  methods  of 
finance  are  the  basis  of  many  inefficiences  in  commercial  and  indus- 
trial enterprise,  if  for  no  other  reason  than  the  example  they  give  to 
the  other  operations.  It  has  sometimes  happened  that  the  natural 
prosperity  and  increasing  wealth  of  the  country  has  saved  an  enter- 
prise that  was  begun  by  a wasteful  and  rash  promotion.  But  this 
condition  will  not  always  obtain.  The  future  will  see  few  successful 
enterprises  that  begin  with  vague  promises  and  a fund  of  optimism. 
It  will  see  more  that  begin  with  scientific  financing  in  accordance  with 
the  principles  of  efficiency. 

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